Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Monday, February 28, 2011

Advances in price time series tests for antitrust market definition

Posted by D. Daniel Sokol

Willem H. Boshoff (Department of Economics, University of Stellenbosch) describes Advances in price time series tests for antitrust market definition.

ABSTRACT: Market definition is an important first step in any competition policy investigation. In competition policy, a market represents the set of products (product market) or regions (geographic market) that constrain the market power of the firm being investigated. Various quantitative tools have been developed for market definition. Econometric tests on price co-movement represent one such set of tools: two regions or products are considered part of the same market if their prices co-move. However, price co-movement tests, especially the more advanced econometric tests, have been criticized in the competition policy literature. This paper applies a range of tools, including correlation analysis, Granger-causality tests, unit root tests and the recent autoregressive distributed lag (ARDL) bounds test, to data from the 2006-2008 competition investigation into business practices in the South African dairy industry. The paper ar! gues that different price tests ask different questions and that it is not useful to argue, say, that the market suggested by a more advanced price test differs from the market suggested by a simple correlation statistic. The paper also responds to the continued practice of criticizing price co-movement for market definition on the basis of the poor performance of conventional price tests: many conventional tests have long been shown to suffer from small-sample power and size problems, but critics fail to account for recent improvements in this regard. The paper concludes that while no single price test offers conclusive evidence on the market, the combination of results offer a rich picture useful for market definition purposes.

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